Back in 2009 University of Chicago Professor and (now) Nobel prize-winner Eugene Fama wrote:

Bailouts and stimulus plans are funded by issuing more government debt.... The added debt absorbs savings that would otherwise go to private investment.... [S]timulus plans do not add to current resources in use. They just move resources from one use to another.... I come back to these fundamental points several times below....

The Sad Logic of a Fiscal Stimulus: In a "fiscal stimulus," the government borrows and spends the money on investment projects or gives it away as transfer payments to people or states. The hope is that government spending will put people to work.... Unfortunately, there is a fly in the ointment.... [G]overnment infrastructure investments must be financed -- more government debt. The new government debt absorbs private and corporate savings, which means private investment goes down by the same amount....

Suppose the stimulus plan takes the form of lower taxes... we can't get something for nothing this way either... lower tax receipts must be financed dollar for dollar by more government borrowing. The government gives with one hand but takes them back with the other, with no net effect on current incomes...

Fama’s argument is that the government cannot increase its total planned expenditure without somebody else decreasing their planned expenditure—that any cash the government spends must be either borrowed from or taxed from private individuals, who then must cut their planned expenditure by as much as the government increases its. This is, it seems to me, the doctrine called “Say’s Law”. Write a 20-minute essay trying to convince Professor Fama he is wrong.

Suppose that it is December 2018 and you are in charge of forecasting the state of the economy in 2020. You believe that potential output in 2022 will be $20 trillion, with a 2% inflation rate, and your baseline forecast given current policies for output in 2020 is $19.4 trillion. You also believe that the marginal propensity to consume is 2/3, and you are working in the income-expenditure model. Suppose, also, that you believe the aggregate supply curve is strongly kinked with inflation anchored at 2%/year: that whenever potential output is above actual real expenditure the inflation rate is 2%/year, but if expenditure rises above the level consistent with output equal to potential output times the price level at 2% inflation, inflation accelerates and the price level rises to keep actual output from rising above potential.

Suppose that the federal government undertakes an extra $200 billion fiscal stimulus infrastructure construction program for 2020, and the Federal Reserve remains passive. How does this change your forecast of GDP and inflation in 2020?

Suppose that the federal government undertakes an extra $400 billion fiscal stimulus infrastructure construction program for 2020, and the Federal Reserve remains passive. How does this change your forecast of GDP and inflation in 2020?

Suppose that the federal government undertakes an extra $400 billion fiscal stimulus infrastructure construction program for 2020, but the Federal Reserve acts to keep inflation from rising above 2%/year. How does this change your forecast of GDP and inflation in 2020? What components of GDP do you think rise and what components of GDP do you think fall in this scenario?

How would your answer to (1) have been different if potential output were not $20 trillion but $21 trillion?

How would your answer to (2) have been different if potential output were not $20 trillion but $21 trillion?

How would your answer to (3) have been different if potential output were not $20 trillion but $21 trillion?

In the first quarter of 2014 the Commerce Department’s Bureau of Economic Analysis estimated that local, state, and the federal government purchased $716.2 billion worth of goods and services, in a context in which total GDP in that quarter was $3,986.6 billion—government purchases were thus 17.9% of the entire economy. Do you believe that this number is lower than is optimal, about optimal, or too high to be optimal? Why? What things have you learned in this course that have changed or confirmed your view of this question?

This is the first time we have taught Econ 2 since 2007, so we are especially anxious for feedback. Write a four-paragraph essay. Pick one element of the course that you thought worked best, and explain why you thought it worked best. Pick one element of the course that you thought worked badly but needs to be improved, and explain how you think it could be improved. Pick one element of the course that you thought worked badly and should be dropped. and explain why it should be dropped. And pick one topic not covered in the course that you think should be added, and explain why it should be added.

B. Supply and Demand: (20 minutes—if you are not through after 20 minutes, skip to the next question): In the central part of the state of Euphoria there is an enormous suburban sprawl, somewhere in the middle of which is Tall Stick, home of Crony Capitalism University. [Founded by a nineteenth-century Robber Baron who told his British investors that their money was safe in his enterprises because he was not just a financier but also a big wheel in the dominant political party and an ex-governor of the state of Euphoria. Ha, ha! Silly British investors! What they thought would be their profits became instead the core endowment of CCU.] We will look at the daily market for bubble-tea drinks near CCU.

Suppose that the quantity of bubble-tea drinks demanded and the quantity of bubble-tea drinks supplied daily are given by the equations:

Demand: P = -10 + Q/800

Supply: P = 20 - Q/1600

where P is the price of a bubble-tea drink in dollars:

What is the market equilibrium price?

What is the market equilibrium quantity?

What is the producer surplus?

What is the consumer surplus?

Explain, intuitively, why the distribution of producer and consumer surplus is what it is.

What would the distribution of consumer and producer surplus be if the supply curve equation were: {IF (10>P) THEN (Q=0)} AND {IF (P≥10) THEN (Q=16000)?

C. Natural Monopoly: (20 minutes—if you are not through after 20 minutes, skip to the next question): All of the 10,000 students at Crony Capitalism University are addicted to The Social Network. The Social Network has no costs: the programming has been done, and the maintenance, bandwidth, and cloud-storage costs are negligibly small. The Social Network sells ads at $1/minute per student—thus if every student watches an ad the advertiser pays The Social Network $10,000; if half the students watch an ad the advertiser pays The Social Network $5,000; and if no students watch an ad the advertiser pays The Social Network $0. The students at CCU who do not install ad-blocking software on their browsers see all ads. The students at CCU who do install ad-blocking software on their browsers see no ads. The fraction F of CCU students who install ad-blocking software is given by the following equation:

F = 0 + Q/300

where Q is the number of minutes of advertisements TSN sells.

What is the revenue curve for advertisements sold by TSN—that is, how much money does TSN earn as a function of how many ads it sells?

What is the profit-maximizing number of ads that TSN as a natural monopolist sells?

Suppose that it costs each CCU student $300 to install ad-blocking software—they have to hire computer-science majors from Euphoric State as consultants to do the job, you see. Assuming watching each one-minute ad is equally painful in utility terms to each CCU student, what is the willingness--to-pay of CCU students for ad-blocking software?

Suppose that CCU decided to charge each of its students a flat fee and use that money to get TSN to supply an ad-free version to CCU students. How large a fee would CCU have to charge to induce TSN to take the deal? Qualitatively, which CCU students would gain from this arrangement relative to the natural-monopoly equilibrium? Which CCU students would lose?

A. Identifications (20 minutes—if you are not through after 20 minutes, skip to the next question): Briefly, in one or two sentences, explain the terms set out and how they have been used in the course:

Suppose that it is December 2020, current forecasts are for a year-2022 level of real GDP of $19.5 trillion without policy changes. Suppose further that you have just moved to Washington to work for the newly-chosen President-Elect as Special Assistant to the Chief Economist of the Office of Management and Budget.

Your boss, the Director of Office of Management and Budget, has asked you to assume that the economy would be producing at potential output come 2022 if it had a real GDP then of $21 trillion, and has asked you to come up with a plan to "get the economy moving again" and restore American production to potential output so that it can once again be, as Ronald Reagan liked to say, "morning in America". In the income-expenditure framework...

Suppose that the Federal Reserve disagrees with your boss, the Director of Office of Management and Budget.

Suppose that in the area around Euphoric State University in the state of Euphoria there are 1500 workers: 500 potters, 500 baristas, and 500 yoga instructors. On January 1, every worker has $4,000 in cash on hand. produces $4,000 worth of their goods each month, which they then send off to the consignment store which sells their goods for them and pays them (in cash) at the very end of the month. Every worker gradually spends their cash on hand down steadily during the month so that they run out of cash just as the month ends--at which point in time the consignment shop pays each of them $4000.

Bearing in mind that everyone's income is someone else's expenditure, suppose that all 1500 workers decide on February 1 that they need to be safer in their financial transactions--that they need to start the month of March not with $4000 in cash but with $4500 in cash:

How much do each of the 1500 workers plan to spend in February?

How much cash on hand do each of the 1500 workers have on February 28?

How large are the payments that each worker receives on March 1, and how much cash does each of the workers have on hand at the end of March 1?

How much do you think each of the 1500 workers will plan to spend in March? "5. How large do you think the payments that each worker receives on April 1 will
be?

Suppose that in the area around Euphoric State University in the state of Euphoria there are 1500 workers: 500 potters, 500 baristas, and 500 yoga instructors. On January 1, every worker has $4,000 in cash on hand. produces $4,000 worth of their goods each month, which they then send off to the consignment store which sells their goods for them and pays them (in cash) at the very end of the month. Every worker gradually spends their cash on hand down steadily during the month so that they run out of cash just as the month ends--at which point in time the consignment shop pays each of them $4000.

Bearing in mind that everyone's income is someone else's expenditure, suppose that the consignment shop announces on February 1 that it won't require cash for purchases in the last quarter of the month--that people can settle up by having their last quarter of the month's purchases deducted from their start-of-the-month payment:

How much do you think each of the 1500 workers will plan to spend in February?

￼2. How large do you think will be the payments that each worker receives on March 1, and how much cash does each of the workers have on hand at the end of March 1?

How much do you think each of the 1500 workers will plan to spend in March?

Suppose irrational exuberance pushes business investment spending up to $3 trillion/year this year as businesses decide they can spend down their cash reserves. What do you expect to happen?

￼3. Suppose irrational pessimism pushes business investment spending down to $1 trillion/year this year as businesses decide they need to cut back and build up their cash reserves. What do you expect to happen?

Suppose that it is December 2020, current forecasts are for a year-2022 level of real GDP of $19.5 trillion without policy changes. Suppose further that you have just moved to Washington to work for the newly-chosen President-Elect as Special Assistant to the Chief Economist of the Office of Management and Budget. Suppose still further that the short-term safe interest rates the Federal Reserve controls are still very close to zero and that the Federal Reserve has promised to keep them very close to zero until at least 2023. Suppose still further that risk spreads on interest rates of different assets are at normal levels.

Suppose that it is June 2015 and you are working in New York forecasting the 2016 economy for Medium-Sized Hedge Fund Named After a Local Geographic Feature. Your bosses want you to inform them about the likely shape of the economy in 2016--not just the total level of real GDP Y, but the levels of consumption spending C, investment spending I, government purchases G, and exports X. Your baseline forecasts--which you get via a painfully-expensive subscription to Mississippi Valley Forecasters--are that for 2016 real GDP (measured in dollars of 2009 purchasing power) and its components will be:

X: Exports: $2.3T

G: Government Purchases: $3.0T

I: Investment Spending: $2.9T

C: Consumption of Domestically-Produced Commodities: $8.9T

Y: TOTAL: $17.1T

Suppose that you believe the marginal propensity to consume cy= 0.6667.

With the price level in 2015 being 1.08, so that expected inflation over the year from 2015 and 2016 is 1.85%.

You are working in New York forecasting the 2016 economy for Medium-Sized Hedge Fund Named After a Local Geographic Feature. Your bosses want you to inform them about the likely shape of the economy in 2016--not just the total level of real GDP Y, but the levels of consumption spending C, investment spending I, government purchases G, and exports X. Your baseline forecasts--which you get via a painfully-expensive subscription to Larry Meyer and company's Macroeconomic Advisors http://www.macroadvisers.com/tag/larry-meyer/--are that for 2016 real GDP (measured in dollars of 2009 purchasing power) and its components will be:

Suppose that, on and near the U.C. Sunnydale campus, the weekly supply curve for lattes is given by the equation Q = max(1000 P - 2000, 0) : nobody makes any lattes unless the price is above $2/latte, and for each $1 the price is above $2 an extra 1000 lattes are made.

Suppose that customers have $10,000/week to spend on lattes. Draw the supply curve and the demand curve.

What is the equilibrium price of lattes? What is the equilibrium quantity of lattes?

Suppose we have students going to Railroad Monopoly University who spend their money on only two things all semester: vacations in Cabo San Lucas (V) and renting BMWs for the weekend (R). And suppose that their utility function is the Cobb-Douglas function with θ = 1/3, and suppose that a student named Jonah H. takes vacations in Cabo on three weekends and rents a BMW for the other 15 weekends of the semester.

What, for that consumption pattern, is Jonah’s marginal rate of substitution between Cabo vacations and renting BMWs? That is, if he takes an additional vacation, by how many BMW rentals could he cut back his BMW renting and still be as happy, still be on the same indifference curve?

Suppose that Channing T. is also a student at Railroad Monopoly University, with the same utility function as Jonah. But suppose that Channing takes vacations in Cabo on six weekends and rents a BMW for six weekends of the semester. What, for that consumption pattern, is Channing’s marginal rate of substitution between Cabo vacations and renting BMWs—that is, if he takes an additional vacation, by how many BMW rentals per average semester could he cut back his BMW-renting and still be as happy, still be on the same indifference curve?

Suppose that renting a BMW costs $50 a weekend and taking a vacation in Cabo costs $500, and that Jonah has $2250 to spend and Channing $3300. Is either Channing or Jonah making a mistake in choosing their consumption pattern? If only one is, which one is making a mistake? Why are they making a mistake?

Explain to either Channing or Jonah—whichever one you think is making a mistake, or both— how they could make themselves happier (or at least more dissipated) if they changed their consumption pattern. In what direction do you think they should change their consumption pattern(s)? How far do you think they should change their consumption pattern(s)? (Or, if you think neither is making a mistake, explain why you think both are doing what they ought to do.

Brie, with only $1100 per semester to spend, has different tastes and preferences. Her utility function has θ=5/6. If Cabo vacations cost $500 and BMW rentals cost $50, is she happiest buying 0, 1, or 2 vacations and spending the rest of her money on BMW rentals? Explain why her optimal ratio of vacations to rentals is different than the optimal ratio for Channing and Jonah.

Suppose that there is a BMW shortage. BMWs now rent for not $50 a weekend but $500 a weekend. And suppose that Jonah, Channing, and Brie have $2500, $3500, and $1000 to spend, respectively. How should each of the three spend his or her money? Explain your reasoning

Suppose Phil and Chris notice that neither Channing nor Jonah actually likes riding around in BMWs. What they like, instead, is impressing each other by renting more BMWs than their co- star—and they feel unhappy when their co-star rents more BMWs than they do. That is, the utility function for Jonah and Channing are actually: Uj = (Vj)θ(Rj/Rc)(1-θ) and Uc = (Vc)θ(Rc/Rj)(1-θ). Phil and Chris calculate how many vacations and BMW rentals, if BMW rentals cost $50 and Cabo vacations cost $500, Channing and Jonah should spend their money on to collectively make them the happiest. What do they conclude? Explain your reasoning. (Hint: suppose Phil and Chris decide to calculate the geometric mean of Channing’s and Jonah’s utility, and then to try to make that product as large as possible...)

Suppose that Phil and Chris are right, that you are in charge of Railroad Monopoly PDC, and that you try to make both Channing and Jonah happier by imposing a tax on BMW rentals. How high a tax do you think you should impose? Explain your reasoning.

What is federal health care spending currently as a percentage of GDP?

What does the CBO think that federal health care spending—Medicare, Medicaid, CHIP, and Exchange Subsidies—is likely to be as a percentage of GDP in 2035?

What does the CBO say that Social Security spending currently is as a percentage of GDP?

What does the CBO think that Social Security spending is likely to be as a percentage of GDP by 2035?
In 2035, CBO projects it to be 6.2%

Why, in your own words, does the CBO believe that the share of GDP the federal government spends on its major “mandatory” programs is going to rise between now and 2035?

What does the Congressional Budget Office project that the federal debt held by the public will be, as a share of GDP, in 2035, if congress and the president either adhere to the “baseline” of current federal programs or if they hold to PAYGO— that is, cut one program or raise taxes by the amount by which they raise another program? What, in your own words, is the logic behind this projection?

What does the Congressional Budget Office project that the federal debt held by the public will be, as a share of GDP, in 2035, if congress and the president continue to do business more- or-less as they have done business since 1980? What, in your own words, is the logic behind this projection?

In 8300 BC there were roughly 5 million people in the world—with an average standard of living of about $500/year. In 1700 there were roughly 640 million people in the world—with an average standard of living of about $500/year. In 1900 there were roughly 1.6 billion people—with an average standard of living of about $565/year. Today there are roughy 7.2 billion people— with an average material standard of living of $8035 dollars per year.

Use the Rule of 72 to calculate the average population growth rate and the average global real GDP growth rate between 8300 BC and 1700 AD.

Use the Rule of 72 to calculate the average global real GDP growth rate between 1700 and 1900 AD.

Use the Rule of 72 to calculate the average global real GDP growth rate between 1900 and 2012.

How much faster has global real GDP growth been over 1900-2012 than it was over 8300 BC-1700 AD?

How much faster has global real GDP growth been over 1900-2012 than it was over 1700-1900?

What would global real GDP be in 2100 if it were to grow as rapidly between now and 2100 as it grew from 1900-2012?

If there are 10 billion people in the world in 2100 and if global real GDP be in 2100 if it were to grow as rapidly between now and 2100 as it grew from 1900-2012, what would average living standards be in 2100?

the inflation rate π equals the previously- expected inflation rate E(π) plus the “slope” β times the difference between the natural rate of unemployment u* and the actual rate of unemployment u—and in which this year’s expected inflation E(π) is last year’s actual inflation, calculate the rate of inflation π:

In the first year, if the starting E(π)=2% per year, β = 1⁄2,u*=5%, and u=5%

In the second year, if E(π) is what inflation was the previous year—that is, if E(π) is your answer to part a—β = 1⁄2, u = 5%, but structural changes in the economy raise u* to 7%

In the third year, if E(π) is what inflation was the previous year—that is, if E(π) is your answer to part b—β = 1⁄2, u = 5%, but structural changes in the economy keep u* at 7%

In the fourth year, if E(π) is what inflation was the previous year—that is, if E(π) is your answer to part c—β = 1⁄2, u = 5%, but structural changes in the economy keep u* at 7%.

What should the government and central bank do if they want to keep inflation from rising?

In an hour the six workers could each teach at most the following number of yoga students: Arya 10; Bran 6; Tegan 4; Taylor 4; Sarah 2; and Zedd 0. In an hour the six workers could prepare at most the following number of lattes: Arya 60; Bran 10; Tegan 20; Taylor 30; Sarah 30; and Zedd 60.

Suppose that some central planner—Mao Zedong, say—grabs three people at random and says “you are making lattes” and tells the other three “you are teaching yoga students”. How many lattes do you expect Mao’s allocation to make in an hour? How many yoga students do you expect Mao’s allocation to teach an an hour?

If you allow the market system to work, what price of yoga lessons £Y would have the economy teaching as many students as you expect to get in Mao’s economy? How many lattes would that market economy produce? How much better off would consumers be as a result?

If you allow the market system to work, at what price of yoga lessons £Y would the economy make as many lattes as you expect to get in Mao’s economy? How many yoga lessons would that market economy teach? How much better off would consumers be as a result?

Write a paragraph, 400 words at most, in which you make your argument to Mao Zedong that he should decontrol the Chinese economy and let it revert back to a market economy. For extra credit, in an appropriate and sensible place, quote Deng Xiaoping: “It is not important whether a cat is red or white; it is important whether a cat catches mice!”

What do you think Mao would say and do in answer to your attempt to convince him to reverse his economic policy course?

The economy around Euphoric State University has three types of workers—-Dharmas, Egberts, and Gregs—-who produce yoga lessons, ceramic pots, and lattes, respectively. In this economy the prices of yoga lessons and ceramic pots are expressed in terms of lattes.

Suppose that Egberts are willing to produce pots according to the following rule: at a price of zero, they will make zero plates, for every 1-latte increase in the price of pots, they are willing to make ten additional pots.

Suppose that demand for pots follows this rule: if pots cost 10 lattes, nobody wants to buy any. Each 1-latte reduction in the price of pots leads consumers to want to buy an additional ten pots.

What is the market equilibrium price of pots in this market?

What is the market equilibrium quantity of pots exchanged in this market?

On January 13, 2009, University of Chicago Business School Professor Eugene Fama wrote:

[S]timulus plans are not a cure.... In a ‘fiscal stimulus,’ the government borrows and spends the money.... [G]overnment infrastructure investments must be financed -- more government debt. The new government debt absorbs private and corporate savings, which means private investment goes down by the same amount.... The government gives with one hand but takes them back with the other, with no net effect on current incomes...”

Write down how you would explain to Professor Fama that this is simply the argument Jean-Baptiste Say made in 1803 (and that he recanted in 1829), and the argument that John Stuart Mill identified the flaw in in 1829. What is the flaw?

Consider a toy economy with eight workers--Lucy, Ricky, Ethel, Fred, Chingachgook, Galla Placidia, Ibn Sina, and An Lushan--that produces two commodities: lattes (large, vanilla-caramel, half-caff, sweetened, made half with skim milk and half with half-and-half--all lattes are equivalent, and take the same time and skill to make), and yoga lessons.

In a shift the eight workers could each teach at most the following number of yoga lessons: An Lushan 8; Chingachgook 8; Ibn Sina 4; Galla Placidia 3; Lucy 1; Ethel 1; Ricky 1; Fred 0.

In a shift the eight workers could prepare at most the following number of lattes: Lucy 20; Chingachgook 20; Ibn Sina 12; Ethel 10, Ricky 10, Fred 5; An Lushan 3; Galla Placidia 2.

Workers can split shifts: spend half their time teaching yoga and teaching half their maximum number of lessons and the other half pulling lattes and making half their maximum number, etc.

All 8 workers want to work a full shift.

What is the largest number of yoga lessons that this economy could teach?

What is the largest number of lattes that this economy could make?

Suppose Joe Djugashvili comes along and--out of the goodness of his heart and his desire to serve the people--volunteers to take on the onerous labor of the head of Production Distribution Coordination and assign people to shifts and tasks. He grabs four workers at random and says “you are pulling lattes”. He tells the rest “you are teaching yoga classes”. What is the expected value of the number of yoga classes taught? What is the expected value of the number of lattes made?

Graph the Production-Possibility Frontier--the PPF--of this economy.

Louie von Mises comes along and says that Joe Djugashvili is a really lousy head of PDC. Is Louie right or wrong? Use the PPF you drew in (4) to motivate your answer.

How many yoga lessons could the economy produce and still produce as many lattes as Joe Djugashvili expected the economy he ran to produce in (4)?

How many lattes could the economy produce and still produce as many yoga lessons as Joe Djugashvili expected the economy he ran to produce in (4)?

Suppose that lattes sell for $4 each. What is the opportunity cost for each of the eight workers of putting them to work teaching an extra yoga lesson?

Suppose that all the students in a yoga lesson collectively pay $15 per lesson. What is the opportunity cost for each of the eight workers of putting them to work pulling an extra latte?

Suppose Joe is still head of PDC. Oskar Lange comes along bearing the results of your calculations from (8) and says that he has a plan by which the economy can produce more than the random-assignment economy of (3). In what order does he tell Joe to pick the people who are going to teach the yoga lessons?

What is the relationship between your answer to (10) and your answer to (4). Is Louie now happy (or at least less unhappy)?

Suppose customers are willing to pay $4 each for lattes and $15 for yoga lessons. Who should Joe assign to teach yoga? To pull lattes? How many lattes will the economy make and how many yoga lessons will it teach?

Suppose customers are willing to pay $4 each for lattes but only $5 for yoga lessons. Who should Joe assign to teach yoga? To pull lattes? How many lattes will the economy make and how many yoga lessons will it teach?

Suppose customers are willing to pay $4 each for lattes and $45 for yoga lessons. Who should Joe assign to teach yoga? To pull lattes? How many lattes will the economy make and how many yoga lessons will it teach?

Which economy--(3), (12), (13), or (14)--is the worst economy? Why?

Which economy--(3), (12), (13), or (14)--is the best economy? Why?

Suppose that the price of lattes is $4 each. Let the price of yoga lessons vary from $0 to $100, and draw the supply curve for yoga lessons.

Suppose that the price of lattes is $2 each. Let the price of yoga lessons vary from $0 to $100, and draw the supply curve for yoga lessons.

Why is your supply curve in (17) different from your supply curve in (18)?

Suppose that the price of yoga lessons is $20 each. Let the price of lattes vary from $0 to $40, and draw the supply curve for lattes.

Suppose that the price of yoga lessons is $10 each. Let the price of lattes vary from $0 to $40, and draw the supply curve for lattes.

Why is your supply curve in (20) different from your supply curve in (21)?

For the supply curve you drew in (18), suppose consumers demand 22 yoga lessons. What is the equilibrium price of yoga lessons?

For the supply curve you drew in (18), suppose consumers demand 12 yoga lessons. What is the equilibrium price of yoga lessons?

For the supply curve you drew in (18), suppose consumers are willing to pay $22 for yoga lessons. What is the equilibrium quantity of yoga lessons?

For the supply curve you drew in (18), suppose consumers are willing to pay $4 for yoga lessons. What is the equilibrium quantity of yoga lessons?

Suppose that there are four people in the economy who demand yoga lessons: Kautilya (a government economist) with an income of $1000/week, Thasuka Witko (a herder and politician) with an income of $500/week, Buffy Summers (a student at U.C. Sunnydale) with an income of $300/week, and Sappho (a poet) with an income of $600/week. Kautilya spends 1/5 of his income on yoga lessons, Thasunka Witko spends 1/10 of his income on yoga lessons, Sappho spends 1/4 of her income on yoga lessons, and Buffy Summers spends half of her income on yoga lessons.

Draw the demand curve for yoga lessons in this economy. What is demand for yoga lessons if the price of yoga lessons is $10/hour? $20/hour? $30/hour? $40/hour? $50/hour?

Consider the same situation as in question (1) but with one difference. Changes in Buffy Summers's life circumstances--the opening of the Mouth of Hell on the U.C. Sunnydale campus--lead her to have no demand for yoga lessons at all as she has to spend all of her income buying sharp wooden stakes. Learning about Buffy's predicament leads Kautilya to boost his yoga expenditures to 1/4 of his income, leads Thasuka Witko to drop yoga entirely and join Buffy in her family business, while Sappho continues to spend 1/4 of her income on yoga lessons. Draw the demand curve for yoga lessons in this economy. What is demand for yoga lessons if the price of yoga lessons is $10/hour? $20/hour? $30/hour? $40/hour? $50/hour?

This new situation sees the rapid growth of a wooden stake-making industry to deal with the influx of vampires onto the U.S. Sunnydale campus. Buffy can make 20 stakes a shift and has an alternative occupation she enjoys as much as stake-making that pays her $60 a shift. Kautilya can make 10 stakes a shift and has an alternative occupation he enjoys as much as stake-making that pays him $200 a shift. Sappho has an alternative occupation she enjoys as much as stake-making that pays her $120 a shift and can make 30 stakes a shift. Thasuka Witko has an alternative occupation he enjoys as much as stake-making that pays him $100 a shift and can make 8 stakes a shift. Draw the supply curve for stakes on the U.C. Sunnydale campus. How many stakes are supplied if the price of each stake is $1? $2? $4? $8? $15? $30? $50?

In this new situation, Buffy realizes that she can order wooden stakes over the internet in unlimited quantities for a price including next-day FedEx shipping of $10/stake. Draw the new supply curve for stakes.

In the same situation as problem (4), suppose that there is a demand for 10 stakes a shift. Who makes stakes? What is the market price of stakes? How about if there is a demand for 50 stakes a shift? 100 stakes a shift? 200 stakes a shift?

Suppose that, on and near the U.C. Sunnydale campus, the weekly supply curve for lattes is given by the equation Q = max(1000 P - 2000, 0) : nobody makes any lattes unless the price is above $2/latte, and for each $1 the price is above $2 an extra 1000 lattes are made. Suppose that customers have $10,000/week to spend on lattes. Draw the supply curve and the demand curve. What is the equilibrium price of lattes? What is the equilibrium quantity of lattes?

Suppose, in the same situation as (6), that the arrival of new, charismatic yoga teachers reduces the amount of money customers have to spend on lattes to $6,000/week. Draw the supply curve. Draw the old and the new demand curves. What is the new equilibrium price of lattes? What is the new equilibrium quantity of lattes?

Suppose that, in the same situation as (6), scary newspaper stories about the health dangers of yoga lead customers to cut back on their purchases of yoga lessons and increases the amount of money they have to spend on lattes to $14,000 a week. Draw the supply curve. Draw the old and the new demand curves. What is the new equilibrium price of lattes? What is the new equilibrium quantity of lattes?

Suppose that, on and near the U.C. Sunnydale Campus, the supply curve for yoga lessons is Q = 100 P. Suppose that customers have $10,000/week to spend on yoga lessons. Draw the supply and demand curves. What is the equilibrium price of yoga lessons? What is the equilibrium quantity? Suppose that the amount of money customers have to spend on yoga lessons rises to $14,000/week? Suppose it falls to $6,000/week?

In the same situation as (9), suppose that the professors at Crony Capitalism Corrupt Rail Baron University 50 miles to the south become lazier, decide they want to teach less, and offer full course credit toward their degree to students who are willing to offer yoga lessons at U.C. Sunnydale. Suppose that enough students to teach 500 places in yoga classes a week drive up to U.C. Sunnydale to add to those offering yoga classes. Draw the new supply curve. Draw the demand curve if people have $10,000/week to spend on yoga lessons. What is the equilibrium price of yoga lessons? What is the equilibrium quantity?

Suppose that the amount of money customers have to spend on yoga lessons rises to $14,000/week?

Apple Computer and Toyota Motors do not allocate goods and services within their organizations with the market system--they use internal corporate central planning. If central planning is as poisonous to an economy as Professor DeLong has maintained, why are large successful corporations are large islands of command-and-control central planning within the market system that do well?

Suppose that we have an economy with four workers. Paris H. can teach 3 yoga lessons or make 20 lattes a shift. Kim K. can teach 2 yoga lessons or make 8 lattes a shift. Mike S. can teach 1 yoga lesson or make 40 lattes a shift. And Pauly D. can teach 4 yoga lessons or make 4 lattes a shift. Suppose customers are willing to pay $4 each for lattes and $15 for yoga lessons.

Who should teach yoga?

Who should pull lattes?

How many lattes will the economy make and how many yoga lessons will it teach?

Suppose that it is May 15, the day before the Econ 2 exam. You have a friend who has blown off the course entirely, knows nothing, but must take the exam on the morrow. It is your task to explain to them how it is that markets can fail to be optimal societal mechanisms for guiding production and distribution decisions. Use graphs and make arguments to try to equip your friend to pass the Econ 2 exam--but remember how little your audience knows, and how basic your explanations must be.

Professor DeLong has claimed that the experience of the twentieth century teaches us that what share of our prosperity rests on the foundations of the market economy? Why has he said this? Do you find his argument convincing? Why or why not?

Suppose that we consider the daily market for ice-cream sandwiches in the neighborhoods surrounding Crony Capitalism Junior University in the town of Old Stick...

Supply: Q = 500(P - 2)

Demand: Q = 11000 - 1000P

What is the equilibrium price? What is the equilibrium quantity? What is the equilibrium producer surplus? Consumer surplus? Pricey ice-cream sandwiches, aren’t they?

Suppose that Production Distribution Coordination—PDC—puts a quota ceiling of 2000 on the number of ice-cream sandwiches that can be sold in Old Stick each day, on the grounds that it does not like people eating too many frozen desserts. What is the equilibrium price? What is the equilibrium quantity? What is the equilibrium producer surplus? Consumer surplus? Deadweight loss relative to the free-market equilibrium?

Why might the standard analysis of the costs of a quota (i.e., the one in Krugman and Wells's Economics underestimate how much value the quota would destroy?

Can you make an argument that the quota is nevertheless a good thing? What is the argument? How convincing do you find it?

Consider the daily market for ice-cream sandwiches in the neighborhoods surrounding Crony Capitalism Junior University in the town of Old Stick...

Supply: Q = 500(P - 2)

Demand: Q = 11000 - 1000 P

Let us say that Production Distribution Coordination--PDC--imposes a price ceiling of $4 on ice-cream sandwiches, on the grounds that nobody should ever have to pay more than $4 for an ice-cream sandwich. What is the equilibrium price? What is the equilibrium quantity? What is the equilibrium producer surplus? Consumer surplus? Deadweight loss relative to the free- market equilibrium?

Let us say that PDC imposes a price floor of $10 on ice-cream sandwiches—on the grounds that underpaid sandwich makers deserve more money. What is the equilibrium price? What is the equilibrium quantity? What is the equilibrium producer surplus? Consumer surplus? Deadweight loss relative to the free-market equilibrium?

Suppose that you have been chosen to give a three-minute—300 word—presentation to PDC arguing to them that the price floor of $10/ice-cream sandwich they imposed in (2) is doing more harm than good. What do you say?

When, broadly, is it a good thing for a government to impose per-unit taxes on production? For it to offer per-unit subsidies? For it to impose quotas? Price ceilings? Price floors?